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ACCA Applied Knowledge · Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Which journal correctly records, at the year end, a prepayment of $1,500 for insurance that was originally debited in full to the insurance expense account?

Debit Prepayments and credit Insurance expense with $1,500. This removes the unexpired portion from the current year's expense and recognises it as a current asset, since the benefit will be received in the following period.

  1. ADebit Prepayments $1,500; credit Insurance expense $1,500Correct
  2. BDebit Insurance expense $1,500; credit Prepayments $1,500
  3. CDebit Prepayments $1,500; credit Accruals $1,500
  4. DDebit Insurance expense $1,500; credit Bank $1,500

Explanation

The expense was overstated by the unexpired part, so credit insurance expense to reduce it and debit prepayments to create a current asset. The reverse entry would increase the expense and remove an asset that does not yet exist.

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